This past week, CNBC published an article suggesting that "There is a crisis of extreme proportions coming towards us" in the multifamily real estate industry. According to the report the luxury market's upper end is crowded and prone to market declines or flattening. Developers of apartments in the 150 largest US towns delivered 395 775 new housing units in the last financial year. This represents an increase of 46% compared to previous years. Of these new homes, around 75-80% are classified as luxury communities. ,Home page.

I've seen a lot of major developments being built at a rapid pace during my time in Boston over the last few years. As a result, the overwhelming majority of these properties are high-end luxury apartments that your average citizens are unable to afford. The Boston Globe's Spotlight Team recently published a series of articles on the progress of the "Seaport" neighborhood. The article highlighted its lack of affordable housing and an overabundance of luxury housing which does not serve the diverse population of the city.

With the arrival of all these new multi-family luxury properties, does this put the entire multifamily market at risk of a flattening or collapse? The threat to Class A new construction is apparent if the market flattens, however; the existing Class B & C multifamily communities are well-positioned to stand up to market imbalances and corrections. Let's look at the reasons the reasons for such a luxury boom and what happens if demand subsides.

Demand for luxury is on the rise

There are two major factors driving the demand for luxury apartments. Millennials and empty nester baby boomers are moving to cities like Boston, Austin, and Denver. They have a keen taste for high-end finishes and luxurious structures. This growth can be attributed to the trend that empty nesters and double-income millennial households are opting to rent instead to purchase. Facilities like top-of-the-line gyms, concierge services and full-service pet spas are becoming the standard. It seems like there is an appalling quantity of amenities available in every new building. Developers are aggressively incorporating these modern perks into their plans, but it's not inexpensively.

New construction is expensive.

The primary reason for the vast majority of the new housing complexes you see that are on the market is luxurious is because of the ever-rising price of construction labor and building materials. Construction labor is highly sought-after and materials are at their most expensive ever. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-4 doesn't matter if it's in a luxury structure or in an affordable structure. It costs the same." As a result of high materials and labor costs and the appreciation of the raw land, developers are forced to build luxury products because the numbers simply don't make sense to construct any other kind of building. Cities are having to enact regulations to force developers to construct an amount of affordable units within their construction projects. Typically between 10%-20% depending on the unit count and location. This will not cause an increase in affordable housing.

If Affordable Housing Isn't Built, what is the alternative? Discover more.

Over the past few decades, there have been several building boom and bust cycles. There are many apartment buildings constructed between 1970 and 1990 in various cities across the country. Although these homes may appear outdated when compared to the buildings that are being built today however, the "bones" are in good shape. Built during this period were constructed with modern materials and techniques. They usually only require surface rehabilitation and wear-related items are able to be repaired. These communities, as well as the secondary markets they're in are strategically placed to counterbalance the influx of luxury new homes and provide housing that's relatively affordable. The benefit of these Class B properties is that they generally excel in all economic climates. If the economy is robust, Class C tenants shift to Class B properties. When the economy is in decline tenants of Class A are forced to relocate to more affordable Class B homes. These properties are often available for less than the price of construction. This allows investors to offer the perfect location to live in and still maintain appealing rents that tenants of different income levels can afford.
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